California manufacturing gets C, report says

A study released last week by Indiana’s Ball State University gave California’s manufacturing climate a C+ for the second year in a row. The report, released annually since 2008, grades all 50 states on nine factors that promote success for manufacturing and logistics.

Maintaining this grade has come at a high cost, with the Golden State’s overall GPA in manufacturing and logistics dropping from last year’s 2.03 to 1.81. California lost points in categories such as unfunded liabilities, benefit costs and industry diversification.

This means trouble for more than just manufacturers.

The state's grade for expected liability gaps such as bond and pension obligations fell from a C last year to a D this year. Filling the gaps could require raising taxes or cutting public services, said Ball State professor Michael Hicks. On Jan. 1, the state raised the sales tax and some income taxes, which voters approved in November largely to fund education.

Hicks, co-author of the report, said the pension issue will burden the state for many years.

"I don't think the outlook for the future of man in California is as rosy as it is in other places," he said. "People came out there because it's where the people are, but I think the unfunded liability gap will be sufficient to deter investment."

California got its lone F in worker benefit costs due to high insurance premiums, Hicks said.

Utah topped this year’s report with an overall GPA of 3.11. The Southwestern state excelled because of availability of qualified workers and low health care costs, Hicks said.

Failing the majority of the categories was Hawaii, only managing C grades in worker availability, benefit costs, tax climate and sector diversification. Hicks said high energy costs and logistical difficulties mean Hawaiians either go without some goods or import them.

Here’s California’s report card with explanations from Hicks:

Manufacturing industry health (C+): Based on three variables — total employee pay, cost of living compared to other states and the share of manufacturing employment per capita.

Logistics (B): The movement of goods, storing of inventory and management of inventory. Hicks said California's logistical strength is in the resources devoted to infrastructure and the shipment of goods through the Port of Long Beach, which is critical for trade with Asia.

Human capital (C): The quality and availability of labor. California's problem with human capital is in the large gap between a poor K-12 education system and strong college system.

"Your world-class two- to four-year college system," Hicks said, "attracts out-of-state students with cheap tuition and nice weather, but when it comes to actually educating your own students, your natives, you're in the lower five to 10 (states)."

Worker benefit costs (F): The costs of health benefits and insurance are high in California.

Tax climate (D): Corporate, income and sales taxes in California are among the highest in the nation. Reasonable property tax rates kept the state from receiving an F in this category, Hicks said.

Global reach (C): The extent of international trade. The reach of California's exports rank in the middle, but Hicks said many foreign companies have in-state locations.

Sector diversification (D): The level of variety in manufacturing sectors. Most manufacturing in the state is in the high-tech or agriculture industries with little in between, Hicks said.

Productivity and innovation (A): The value of goods per worker and inventions coming from research. With an active research university system and technological innovations coming out of Silicon Valley, it is no surprise California excels in productivity and development, Hicks said.